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VRTU earnings call for the period ending March 31, 2019.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Virtusa Corporation Fourth Quarter Fiscal 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) And please note that today's event is being recorded.

And I would now like to turn the conference over to William Maina of Investor Relations. Please go ahead.

William Maina -- Senior Vice President

Thank you and welcome to Virtusa's fourth quarter and full fiscal year 2019 earnings conference call, where we'll be discussing our financial results for Virtusa's fourth quarter and full fiscal year ended March 31, 2019. On the call with me are Kris Canekeratne, Chairman and Chief Executive Officer; and Ranjan Kalia, Executive Vice President and Chief Financial Officer.

Certain statements made on this call that are not based on historical information are forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. During this call, we may make, express or imply forward-looking statements relating to, among other things, Virtusa's expectations and assumptions concerning Management's forecast of financial performance; the growth of Virtusa's business; the ability of Virtusa's clients to realize benefits from the use of Virtusa's IT services and Management's plans, objectives and strategies. These statements are neither promises nor guarantees and are subject to a variety of risks and uncertainties, many of which are beyond Virtusa's control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Virtusa undertakes no obligation to update or revise the information disclosed during this call, whether as a result of new information, future events or circumstances or otherwise.

Other statements on this call also include certain non-GAAP financial information as defined by the SEC. We present constant currency revenue to provide a framework for assessing how our revenue performed, excluding the effect of foreign currency rate fluctuations. We provide non-GAAP adjusted operating income, non-GAAP adjusted net income and non-GAAP earnings per share, which we believe provide insight into the operational performance for our business. Reconciliations of non-GAAP to GAAP measures are included in today's earnings press release and data sheet, which can be found on the Investor Relations page of our website. We also present a reconciliation of cash, cash equivalent, short-term and long-term investments that we believe provides insight to our total cash position and overall liquidity. Please note that a supplemental data presentation to our fiscal fourth quarter results has also been posted to our IR website. For additional disclosures regarding these and other risk factors faced by Virtusa, please see the disclosures contained in Virtusa's public filings with the SEC and in our earnings press release.

With that, I'd like to turn the call over to Kris. Kris?

Kris Canekeratne -- Chairman and Chief Executive Officer

Thank you, Will. Good evening, everyone, and thank you for joining us today. I'll begin by running through some fourth quarter and full year fiscal 2019 financial highlights.

Total revenue for the fourth quarter was $327.6 million, representing 4.1% sequential and 16.5% year-over-year growth. Our Q4 non-GAAP operating margin was 10.4%, up 50 basis points year-over-year and we delivered non-GAAP EPS of $0.46. For the full year fiscal 2019, we generated approximately $1.25 billion of revenue, up 22%, delivered 140 basis points of non-GAAP operating margin expansion in line with our guidance and posted non-GAAP EPS of $2.12, up 30% from fiscal 2018. Overall, we are pleased with our fiscal 2019 results, which reflect strong execution across our business and validate our leading position in the digital engineering market.

Looking ahead, our fiscal year 2020 revenue guidance reflects double-digit growth at the midpoint, driven by continued momentum across the majority of our clients and all of our industry verticals, partially offset by a slower than previously expected start to the fiscal year at one of our banking clients, where we are seeing interim budget constraints as well as typical Q1 seasonality at one of our telecom clients. While we expect revenue from these two accounts to decline sequentially in the first fiscal quarter, we are expecting to resume sequential growth in the second quarter based on our backlog, pipeline and revenue visibility into Q2 and beyond. From a profitability standpoint, we expect to deliver strong non-GAAP operating margin accretion and EPS growth in fiscal year '20, reflecting our top line performance and our ongoing productivity improvements.

Notwithstanding a softer fiscal Q1, we are seeing strong business momentum across the majority of our client portfolio, supporting our expectation for continued double-digit organic growth in fiscal 2020. Underlying this growth is strong demand across all of the sectors we serve for deep digital transformation and cloud transformation, which are the two pillars essential to competing in today's digital-first world and all areas where Virtusa has proven leadership and distinct competencies.

Given the growing demand, the market conditions and our unique position, we will continue to focus our go-to-market on these two demand drivers. Our distinct delivery approach is focused on both business outcomes and productivity and centered on creating client-specific high performance, integrated, Agile Scrum teams. Our design build teams are comprised of domain experts, solutions architects and full stack engineers. Their unique composition and depth of competency allows us to efficiently deliver on the promise of digital and cloud transformation. I'd like to explain a little more about each area and how we are delivering measurable impact for our clients.

The digital transformation pillar is getting more strategic attention and more budget as clients across industries realize the importance of creating frictionless digital experiences for their end customers and consumers in order to both protect and grow market share. Our digital transformation capabilities are delivered via our Agile Scrum teams and enhanced by their domain expertise, gamified, continuous integration, continuous deployment tool sets, accelerators and adapters. This delivery approach is setting a high bar in the industry for both productivity and outcomes.

Our ability to combine cutting-edge middleware technology with pre-built adapters for technologies like artificial intelligence and machine learning enable us to create hyper-personalized digital channels that can deliver a custom-tailored digital experience based on a user's preferences and interests. Through our digital transformation team based solutions and services, we are allowing clients to better engage with their end customers, drive higher customer retention, improve margins and establish significant competitive advantages.

Let me now walk you through an example that illustrates how our digital transformation team based capabilities are enabling us to dramatically expand our client book of business. Our digital transformation journey with the top 10 US bank is a testament to the quality of our Agile Scrum teams, our domain expertise, our leading gamified CICD platform and our banking and financial services accelerators and adapters. The improved functionality coverage by 30% increased user visits by over 20% online and over 40% on mobile and enacted a state-of-the-art CICD pipeline for continuous innovation.

What started as a proof-of-concept relationship has ended with us being selected as their digital partner expanding our work across multiple lines of business. Notable engagements with this bank include delivering deep digital transformation across mobile applications, digital wallet integration and open banking platform with secure data exchange and an API platform using pre-built accelerators with the largest BIAN compliant API gateway. Overall, we greatly increased the velocity of the ideate experiment, built and deployed cycle, streamlined operations, set and exceeded aggressive KPIs and established a formidable multi-year partnership with this client.

Moving to the second driver of demand, we are seeing increased levels of investment in legacy technology modernization through our cloud transformation solutions and services. Today, many of our clients are beginning to realize the significant cost reduction and efficiency improvement benefits of moving to cloud native architectures, which enable substantial speed to market, data management and storage efficiency gains. Once again, our Agile Scrum team approach enabled by our engineering arbitrage led platforming methodology provides us with significant competitive advantages as we help our clients rationalize, consolidate and sunset their redundant systems. The bottom line results to them are greatly reduced operating costs and improved IP efficacy.

To capitalize on this demand trend, we have continued to implement initiatives that further strengthen our leadership in cloud offerings and services. Last quarter, we announced a strategic collaboration agreement with Amazon Web Services to build solutions that help clients accelerate their digital transformation and cloud adoption initiatives and we are very pleased with the results of this partnership.

One recent example of the work we are winning in cloud transformation is with a large bank in the United Kingdom that we were selected to manage their data and application cloud migration, driven in part by data ring-fencing laws requiring physical separation of data. First phase of our multi-year engagement includes the reengineering and the migration of over 350 applications from a variety of distinct and disparate systems, some of which are currently shared by various business units with partial sharing of underlying data. To address these requirements, the Agile Scrum team designed a scalable native cloud platform with a focus on workload prioritization, building the foundation for further development of the platform, separation of systems, ring-fencing and preventing future data sharing and addressing bandwidth demand of the separated business entities.

We were chosen for this engagement because of the team's strengths in deep digital engineering, industry domain expertise in banking and financial services and second to none cloud platform expertise. This deal also opens the door for further collaboration with the client as we will be able to leverage our institutional knowledge of the client's technical environment to rapidly ideate, build and deploy highly customized solutions.

A fine example represent client work that bridges the digital and cloud transformation areas, ranging from creating digital-only businesses to business-enabling platforms. The assigned Virtusa team bring together comprehensive domain knowledge, deep digital engineering capabilities, real-time gamified CICD product development, cloud native architectures, micro services, assets and starter packs. Their ability deliver solutions and support tools both built by us and through FinTech and other ex-tech communities enables us to quickly design, test and deploy digital-only businesses and platforms.

In one such instance, the private banking division of a multinational diversified financial services client with operations in the UK and EU engaged Virtusa to develop a seamless open banking architecture and deploy an API developer sandbox environment in order to rapidly rollout cutting-edge services to their consumers without the traditional time, cost and risk of in-house development. As a result of our strong reputation for unparalleled digital engineering capabilities and deep industry specialization, we have been engaged to create an alternative digital-only bank, including account information services, payment initiation services, confirmation of funds and event notification services via authorized registered third-party providers.

With our proprietary accelerators and in-house developer tool sets, we have, in the short period of a few weeks, already completed deployment of the developer API sandbox portal and the sample micro services that can easily interface with thousands of FinTechs for rapid design, experimentation and deployment. We are currently in the process of completing the API-fication into downstream core systems for account information and payment services. Leveraging our digital Scrum team, gamified CICD processes, tools and assets, we are disrupting the typical software development lifecycle and deployment lifecycle from months and years to days and weeks.

The ongoing momentum in our digital lines of business continues to give us confidence that Virtusa is in a position of strength to capitalize on the burgeoning digital transformation and cloud transformation space. Our focused investments over the past several years in deepening our industry knowledge and expanding our digital engineering competency have equipped us with the requisite skills and competitive advantage to deliver deep digital to our clients, gain market share and place us at the forefront of digital, cloud and even business transformation.

Our unique Agile Scrum team and platform approach provides the underpinnings that enable us to realize our clients' end-to-end digital transformation journeys. Our proprietary processes, tooling, adapters and accelerators enable us to provide considerable advantages to our clients in terms of both quality and efficiency. We are seeing consistent evidence that our Agile Scrum teams that adopt and utilize Virtusa's gamified tools, processes, adapters and accelerators are over 30% more productive. And perhaps, most fundamentally, our ability to modernize and rationalize our clients' entire IP estate from platforms and infrastructure to application and interfaces allows us to create digital experiences that are at the forefront of today's digital economy.

In conclusion, we are pleased with our fiscal year 2019 performance and we are excited about the growth opportunity ahead of us. While softer spend at one of our banking clients will have an impact in Q1, we are seeing sustained growth in our pipeline as our clients continue to invest in IP as a strategy to improve or maintain their competitive edge. Deep digital is becoming a significant part of our clients' transformation agenda in all industries and we are very well positioned to provide a leadership role in digital and cloud transformation.

Now, I'd like to turn the call over to Ranjan who will provide more details on our results as well as our first quarter and fiscal year 2020 guidance. Ranjan?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Thanks, Kris. And good evening to everyone. Let me start by summarizing the results of our fourth quarter and full year fiscal 2019. I will then provide our current guidance for both the first quarter and fiscal year ending March 31, 2020 before opening the call for questions.

Revenue for the fiscal fourth quarter was $327.6 million, an increase of 4.1% sequentially in reported currency and 3.8% in constant currency. Our fourth quarter revenue was below the midpoint of our prior guidance, mainly due to performance at one of our banking clients. Year-over-year, fourth quarter revenue increased 16.5% in reported currency and 17.9% in constant currency. Our gross margin in the fourth quarter was 29.7%, up sequentially and in line with our expectation. GAAP operating income for the fourth quarter was $23 million, up from $19.3 million in the prior quarter and $16.4 million in the year ago period.

Fourth quarter other expense was $9.9 million. This includes $1.3 million of net foreign exchange loss and $8.6 million of net interest and other expense. Net interest and other expense includes $4.1 million of net interest expense, $4 million of impairment charge on land reclassified as held for sale and $500,0000 of writedown of an available for sale security both acquired through the Polaris acquisition. GAAP earnings per diluted share was $0.24 in the fourth quarter. This compares to GAAP EPS of $0.37 in the prior quarter and $0.06 in the year ago period. Our Q4 2019 GAAP EPS includes $1.3 million or $0.04 per share of BEAT tax, which was not contemplated or expected in our prior guidance.

Turning to our non-GAAP results. Non-GAAP operating income was $34 million compared to $32.7 million in the prior quarter and $27.9 million in the year ago period. Fourth quarter non-GAAP operating margin was 10.4% consistent with the prior quarter and up 50 basis points from the year ago period. Non-GAAP diluted EPS was $0.46 in the fourth quarter of fiscal 2019. This compares to $0.61 in the prior quarter and $0.55 in the year ago period. Our fourth quarter non-GAAP EPS was below our prior expectations partly due to $4.3 million or $0.13 per share of BEAT tax recognized in the fourth quarter, which was not expected or contemplated in our prior guidance.

Turning to the balance sheet. Ending cash at March 31, 2019 was $223.1 million inclusive of cash and cash equivalents, short-term and long-term investments. Our cash declined by approximately $30 million sequentially, primarily due to $11 million of CapEx investment and cash paid for second tranche of the eTouch acquisition consideration, which totaled $50 million and was paid using $8 million of cash on hand and $42 million raised through debt. Cash used for operating activities was $1.2 million in the fourth quarter. Our DSO for the fourth quarter were 76 days versus 71 days in the prior quarter and 78 days in the year ago period.

Now, I will turn to a more detailed discussion of our fourth quarter revenue performance by industry group. Revenue across our industry groups was as follows. BFSI revenue increase 80 basis points sequentially and 6.7% year-over-year, representing 61% of revenue. Our BFSI results in the fourth quarter were below our expectations, primarily driven by performance at one of our banking clients. Results from our largest client were essentially in line with our forecast.

Communications and technology revenue increased 16% sequentially and 48% year-over-year, representing 31% of revenue. C&T performance was above our expectations and driven primarily by growth at our technology and telecom clients. Media information and other revenue was down 10% sequentially and up 80 basis points year-over-year, representing the remaining 8% of revenue and largely in line with our expectations. With respect to our geographical performance of our sequential revenue growth was led by Europe, which grew 7.3% and North America which was up 3.5%.

I would now like to briefly summarize our consolidated financial results for the full fiscal year 2019 as compared to fiscal year 2018. Revenue was approximately $1.25 billion, an increase of 22.3% year-over-year. On a constant currency basis, revenue increased 22.7% year-over-year. GAAP diluted EPS was $0.38 compared to a loss of $0.09 for fiscal year 2018. On a non-GAAP basis, non-GAAP operating profit was $123.2 million, up 41.5% and $87.1 million in the prior year. And operating margin was 9.9%, up 140 basis points from 8.5% for fiscal year 2018. Non-GAAP net income was $71.3 million or $2.12 per diluted share compared to $52.8 million or $1.63 per diluted share for fiscal year 2018. Excluding the BEAT tax impact of $0.13 per share in the fourth quarter, our full year 2019 non-GAAP EPS is $2.25, up 38% year-over-year.

Now, I will provide our current guidance for our first quarter and fiscal year ending March 31, 2020. Revenue in the first quarter of fiscal 2020 is expected to be in the range of $313 million to $321 million. Non-GAAP diluted EPS in the first quarter of fiscal 2020 is expected to be in the range of $0.37 to $0.43. Our Q1 fiscal 2020 non-GAAP EPS guidance anticipates an average share count of approximately 34 million.

For the fiscal year ending March 31, 2020, we expect revenue to be in the range of $1.35 billion to $1.399 billion. Non-GAAP diluted EPS for fiscal year 2020 is expected to be in the range of $2.58 to $2.82. Our guidance excludes $29.7 million of stock compensation expense and $14.6 million of acquisition-related charges. Full fiscal year 2020 non-GAAP EPS anticipates an average share count of approximately 34.2 million.

Our domain expertise in BFSI, healthcare, media, telecom and high-tech combined with our deep digital engineering capabilities and delivery excellence is helping our clients to undergo significant digital transformation. Our enterprise clients' IP initiatives include cloud migration, payment modernization, open APIs and legacy modernization through platforming. Our banking portfolio is forecasted to show sequential revenue decline in fiscal Q1 due to a decline at our large banking client. This is masking growth at many of our other banking clients. Revenue from our largest client is expected to decline sequentially in fiscal Q1 due to budget constraints, but we are expecting to resume sequential growth in Q2.

For the full fiscal year, we expect revenue from our largest client to decline in the high single-digits. At the midpoint of our fiscal Q1 guidance, revenue is expected to decline approximately 3% sequentially due to the decline at our large banking client, which I just discussed and seasonality at our large telecom client. Non-GAAP operating margin will decline by approximately 290 basis points versus Q4 '19, reflecting the lower -- the impact of lower revenue on utilization and contractor expense, annual compensation increases and visa expenses. We expect sequential revenue growth and margin acceleration to resume in fiscal Q2, driven by broad-based growth across all three industry verticals with sequential growth at our largest client.

For full fiscal year 2020 at the midpoint of our guidance range, we expect revenue growth of 10.5% driven by broad-based growth across our key industry verticals and across our portfolio of top 10 and non-top 10 clients. In addition, we expect non-GAAP operating margin accretion of 100 basis points in line with our long-term forecast. Lastly, we are expecting strong non-GAAP EPS growth of 27% in FY '20.

Our FY 2020 revenue visibility is consistent with FY '19 and is comprised of slightly better than historical backlog and qualified pipeline. Consistent with prior year, our guidance anticipates that 99% percent of our revenue will come from existing client portfolio. Our non-GAAP effective tax rate is expected to be 31.3% for fiscal year 2020. This does not anticipate any BEAT tax impact as we have embarked on a plan to reorganize our India legal entities. Our current non-GAAP guidance anticipates $18.5 million of interest expense.

In conclusion, while we will experience a slower start to FY '20, we anticipate accelerated revenue growth beginning in second quarter and double-digit top line growth for full year at the midpoint of our guidance. Continued execution of our profitability initiatives are expected to allow us to deliver 100 basis points of non-GAAP operating margin accretion and strong EPS growth in excess of revenue growth in FY '20.

I will now turn the call over to the operator to begin Q&A. Thank you.

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) And our first questioner today will be Mayank Tandon with Needham and Company. Please go ahead.

Mayank Tandon -- Needham and Company -- Analyst

Thank you. Good evening. Kris and Ranjan, could you give us a little bit more insight into what transpired in the quarter around the large banking client? Maybe share some more details around that and then the impact, obviously, on guidance for the first quarter and for the full year. And then related to that would be just the visibility that you have, given the slow start to the year to the targets that you set for fiscal '20.

Kris Canekeratne -- Chairman and Chief Executive Officer

Sure, Mayank. This is Kris. So, Mayank, our large client trimmed some of their budgets in some of the areas that we are engaged in toward the second half of the March quarter. This is what's reflected in our Q1 guidance. From these levels, we expect sequential growth through the remainder of the year. We're also very enthusiastic about some of the newer starts on newer areas that we have recently opened at our large client and we expect that those new areas will also continue to expand with us during the remainder of the year. So at this point in time, while Q1 is off to a slower start with our large client, we fully expect that we will see sequential growth in Q2 and beyond, partly driven by the areas that we have significant strength and presence in, continuing to expand with us, albeit from a slower start and the newer areas contributing in a more meaningful way.

I'll let Ranjan provide more insights into guidance.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So, Mayank, just with regards with the large client, there have been a few public statements that you can go and look at and which really talks about that they're expecting to have budget reductions at the enterprise. Those budget reductions we believe lot of are being impacted in Q1 just setting up a new run rate and starting to accelerate from them. When we look at our backlog, when we look at our pipeline, like I said earlier, the backlog percentage and the pipeline is actually slightly better than last year this time. So actually, it gives us comfort. This -- and in Q4, this large client actually performed as per our expectations. So the whole piece was really impacting Q1, where we believe they're really just trying to realign their Q1 run rate and expecting to really grow from there.

Mayank Tandon -- Needham and Company -- Analyst

Got it. And then if I can just squeeze one more in around margins. Ranjan, I think you've, in the past, always talked about 100 basis points to 150 basis points of margin expansion at the operating level. This year, you're saying 100 basis points. Maybe just give us some context in terms of why the lower target for this year. And then also related to that would be the trajectory of margins as we go through fiscal '20.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yep, sure. So, Mayank, 100 bp, as you will see that there is a dip, that stronger dip that we are taking in Q1 largely because of the impact of revenue that happened and utilization will go down. And we believe that there's really no point in taking any drastic impacts on improving utilization and let the utilization really grow through increase in revenue that will come through. So that's playing a little bit out there. We feel really good about the 100 basis points. If we look at it -- two years ago, we had 200 basis points. Last year, we had 100 basis -- 140 basis points. This year, we're really going into 100 basis points. Very, very strong margin accretion. Inside this 100 basis points, there's actually also a large deal that we have, which is very strategic in nature. We actually give a little bit for lower margin, which as that deal evolves throughout the year, that's going to continue to have margin accretion and that deal is going to place Virtusa to be a very significant digital player at a very large healthcare enterprise. So that's also being absorbed in the 100 basis points impact.

Mayank Tandon -- Needham and Company -- Analyst

Great. That's helpful. Thank you.

Operator

And our next questioner today will be Puneet Jain with JPMorgan. Please go ahead.

Puneet Jain -- JPMorgan -- Analyst

Hi. Thanks for taking my question. So your Q4 revenue came in below consensus expectations by about $3 million. Is all of that you would attribute to the slower growth in large banking financial services client?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

That's right. So it's all, like I said, Puneet, it's really all banking and it's really all banking -- one of our large banking clients. And that -- it's not really the largest banking client, it's another large banking client. This was primarily on-boarding-oriented, but that large banking client is growing very strongly in FY '20.

Puneet Jain -- JPMorgan -- Analyst

And I know you mentioned like you have like higher guidance in your backlog for fiscal '20. Can you give us numbers like how much visibility you have? Like -- or how much of your guidance is in the backlog beyond Q1?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yeah. So historically, Puneet, we've always gone out with a backlog in the mix 70s. This time, the backlog is slightly higher than that. We've gone out with the revenue visibility that will be in the high 80s this time, the revenue visibility, which means your qualified pipeline and your backlog is slightly higher again.

Puneet Jain -- JPMorgan -- Analyst

Got it. And if I can quickly ask, like this large deal, this new deal that you talked about just now. Is this a deal at one of your existing clients? Is it already baked in the guidance? Can you share some more details on that?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Sure, sure. It is a client that we have worked last year with. It is incorporated in the guidance and we believe that there is potential for it to really go higher than the midpoint of the guidance. But since we are really starting, we've tried to really look at all different ways and allocate a revenue visibility in the midpoint of the guidance, but we do believe that this deal could do better than the midpoint of the guidance. As we travel, we'll let you know more about it. We are very excited about the deal. Like I said, it really clearly will place us to be a very significant digital partner with this very large healthcare enterprise.

Puneet Jain -- JPMorgan -- Analyst

Got it. Thank you.

Operator

And our next questioner today will be Maggie Nolan with William Blair. Please go ahead.

Ted -- William Blair -- Analyst

Hey guys. This is Ted (ph) on for Maggie. Thanks for taking our question. So we wanted to ask about your long-term view of growth. So, now that eTouch will have annualized after the first quarter, how should we think about the long-term profile of the Company? Is the implied guidance and growth rate from Q2 through Q4 what you would consider to be normalized and sustainable on a go forward basis?

Kris Canekeratne -- Chairman and Chief Executive Officer

So, when you look at the number, right, so we've always now called eTouch and -- organic, everything is really organic for us, right, the way we look at it. Yes, there's a Q1, there's a dip like I talked to you about a 3% sequential growth. But from there, we're really talking about sequential growth that are in the mid single-digits and in some of the quarters that's actually slightly even north of that. So very excited about that. And it's largely the comfort that comes to -- if our large client, which really impacted a big piece of the Q1 decline that we have, if we believe that that large client is really going to turn around in Q2, that in itself is going to fuel a lot of growth and then the rest of the business continues to deliver very strongly too.

Ted -- William Blair -- Analyst

Okay. Thank you. And then last question from me. So wanted to ask about client budgets and kind of your expectations. And I know we've had a lot of conversation so far on the call today about the one large banking client and some of the pullbacks there. We've heard some commentary from some of your other peers regarding slowdown in financial services. So if you could add some color into the various sub-sectors within financial services and what you're seeing there? And kind of what your expectations are from within those different sub-sectors? That'll be helpful.

Kris Canekeratne -- Chairman and Chief Executive Officer

Sure. So this is Kris. For the most part, we are seeing that client budgets are very similar to what it was last year, maybe flat to maybe slightly up. But I think what's much more exciting for us is that the spend in the areas that we are strong in is actually increasing. So specifically, the areas that clients are investing in has to do with digital transformation and deep digital to be able to provide end-to-end seamless digital access to consumers and to customers. That's an area that they are locating budget, increasing budget, increasing investment and we are extremely well positioned to reap the expanding budgets in digital transformation. On the BAU side of the house, while to a large extent they're reducing their application or application development and maintenance spend, their support spend, et cetera, they are specifically investing in cloud transformation and essentially simplifying and reducing the complexity and the redundancy of the IP systems and the IP estate. Also, an area where Virtusa has significant strength in. So notwithstanding the short-term slowdown at our large client, the momentum in our business is very strong and that's further reflected in our pipeline. And we fully expect that we will have sequential growth in Q2 and beyond for this fiscal year and fairly strong sequential growth, driven by us being very well positioned to intersect the investments that are being made in digital transformation and in cloud transformation at our clients, and quite candidly, a lot of the enterprises in the industries that we serve.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

I just wanted to add, we believe that it's -- the banking growth and the budgets, it's not a macro broad-based trend. We believe there's certain clients who are just going through their budget adjustments, which are really those accounts, those client related. Because our -- rest of our banking portfolio is expected to grow this year for the full year, many clients are expected to grow very significantly. I mean, we -- out of our top five clients, we will have four clients, which will cross $100 million of revenue, and this is not run rate revenue that I'm talking, this is they will across $100 million of revenue this year. And that's how significant the trajectory is. Yes, we are facing a issue in Q1.

Ted -- William Blair -- Analyst

Understood. Thanks for that. Thank you.

Operator

And our next questioner today will be Joseph Foresi from Cantor Fitzgerald. Please go ahead.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. My first question is around the large banking client. I guess, my question there is you've seen the slowdown in one area and it sounds like you're pitching a pickup in some other areas that I believe you're implying are going to compensate for the slowdown. I felt like the slowdown was a surprise. So I guess, specifically within that client, what -- help me kind of reconcile those two comments, right. You were surprised by the slowdown in one area, yet you feel confident that it's not going to happen again and you're going to pick up in another.

Kris Canekeratne -- Chairman and Chief Executive Officer

So clearly, the slowdown, we started seeing some of the slowdown in the second half of our fourth quarter. And as we got deeper into it, our understanding, and some of this is actually in the public domain, is that our large banking client is recalibrating and readjusting their spend across different parts of their business. So clearly the biggest single area of contribution to Virtusa from our large client has been in their Institutional Client Group, which is the corporate banking side and that's the side that is going through, what I would call, a budget recalibration or readjustment. We believe that that readjustment and that recalibration is done, there is a new baseline for them in terms of what they will spend in ICG, we have absorbed that in our Q1 and we believe that that area, the ICG area of our large client will continue to sequentially grow with us from a slower start in Q1. So we expect that even the area that has had the slowdown for the remainder of the year, although visibility of a pipeline and our expectations are that that site of the house will grow. Notwithstanding, and I have shared this in prior remarks, we have been slowly expanding at our large banking client into the other areas of spend in the banking client that are unrelated and separate from the Institutional Client Group side. Those areas continue to expand with us. Those are areas that are on the consumer banking side, those are areas on the infrastructure side, their cloudification becomes very meaningful and important and we expect that the ongoing expansion or sequential growth from ICG, albeit from a slower start and the contribution of the other areas they're seeing expansion and growth and have strong visibility, will contribute toward our large banking client, continuing to grow with us in Q2, Q3 and Q4.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. So essentially, because you'll face tougher comps, right, because there was a shortfall in 4Q, but 1Q is a tough comp, you think that these new areas will compensate for the delta between the lower run rate and what you were doing last year. Is that fair?

Kris Canekeratne -- Chairman and Chief Executive Officer

We expect that in the aggregate that we have a -- we have good visibility to continue to grow and scale Citi in Q2 and beyond. And our expectations are that we will have a similar revenue year to -- fiscal year '19. I think marginally down, is it?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Yeah. So Joe, like I spoke in my prepared remarks, we believe our largest client will be down year-over-year. So a lot of this, I want to make sure it's not like it's a complete surprise to us. Yes, the gravity of the budget reduction was a surprise to us. But if you really look at it, even in our last call, we had talked about that we were expecting our large client to be down versus Q3 levels. So we were starting to see -- and that's because we are so strategically placed with the clients and their budgets, we were really starting to get that visibility. It's just that significant. How deep it was? That's not what was expected by us and that's what really impacted Q1. But the rest of the business is growing so well on Virtusa side. Like I said, four of the five clients could be more than $100 million clients. I mean, that's a significant achievement if we can really make it happen this year.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. Okay. And then just on the mechanics around this, would that slowdown, have you -- or do you plan on slowing down hiring? Do you have to take people who are on one part of the Citi project repurpose them and retrain them for the other part? I'm just -- I know, margins are going to be tough in 1Q, I'm trying to get a sense of sort of how that margin trajectory shakes out and how utilization shakes out throughout the year.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So, Joe, we don't believe we need to do any -- very significant transformational changes in the operations of the Company because of this Q1 event. We are willing to run the business in Q1 with a little bit lower utilization, we've been through these scenarios before. We believe the revenue growth will come up and therefore the utilization will go up. We are -- even for the full year, this is not -- we are not really expecting our utilization significant increases over year-over-year, I mean, we're planning to pretty much run utilization in about the 83% range because we have plenty of other levers that are going to continue to help us increase gross margin. So in summary, we're not planning to take any significant impacts around utilization or headcount because we believe that the revenue growth is going to be turning around in Q2.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Okay. And last question from me just on telecom. I know that this is part of their typical seasonality, is there anything to call out on it being worse than in prior years or better than in prior years? I just want to get a sense of how that works.

Kris Canekeratne -- Chairman and Chief Executive Officer

Sure. Yeah. So, we've always had seasonality with our large telecoms account, whose fiscal year is the same as ours and their budgeting cycle is very similar. So that's very similar in nature to prior years. We are seeing strong activity and momentum in our large telecom clients and we expect that our large telecom clients will be a growth account for us in fiscal year '20.

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Joe, as a percentage change from Q4 to Q1, it's very similar with prior quarters prior years. Because that large client is also running north of $50 million now, so therefore the dollar impact is a little bit.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. Okay. Thank you.

Operator

And the next questioner today will be Bryan Bergin with Cowen. Please go ahead.

Bryan Bergin -- Cowen -- Analyst

Hi, thank you. I wanted to ask on margins here. Can you unpack that 100 basis points of projected expansion? Where you're expecting to generate that from? And is that a midpoint of a range or are you fairly comfortable in that level as the base case?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

So Bryan, that is at the midpoint of our range. We believe just like we've talked about it before, the margin accretions for us the way we plan our business, half of it comes from gross margin, half of it comes from SG&A. That is no different the way we look at it this year. In the gross margin, we have slight increases in realized pricing that we're really expecting to get. Some of that will offset increased -- onsite effort increases that we are expecting to have because of the whole digital business and fees that we're talking and then we continue to have SG&A leverage, which we have been doing it for several years. So we continue to feel comfortable on how we operate our business by controlling expenses and delivering a higher revenue base.

Bryan Bergin -- Cowen -- Analyst

Okay. On the healthcare deal that you mentioned, just curious on that client. There are some peers that have cited issues with healthcare client spending. Is this kind of -- is this net new spending? Is this you taking share because of where you're positioned in a particular account? Can you just give us a little bit more flavor on that?

Ranjan Kalia -- Executive Vice President and Chief Financial Officer

Well, once we go through the initial deal that I was talking about is and then set ourselves up for this significant digital vendor, I mean, I think in that case, it'll probably be both, right. Some of it will be share and some of it will be the incremental spending. But I believe that's something that -- if the year plays out, we have to really do the first deal that we have talked about once -- and we want to do a good job on that. Once we do that, it's really setting ourselves up for second half and the year after to really be that very strategic vendor for this client.

Bryan Bergin -- Cowen -- Analyst

Okay. Just one more for you. On the BEAT tax, just can you give us a little bit of color? What changed so dramatically that wasn't contemplated in the guidance previously, as far as I guess the interpretation around it? And then what can you do in your structure to drive that rate back down?

Kris Canekeratne -- Chairman and Chief Executive Officer

Sure. Good. Fair question. So what changed was on the GAAP and the non-GAAP side, it's just the -- how the allocations of the foreign tax credits, how they netted off with the taxes that you have to pay. That was a little bit of a surprise for us. And the cross charges that happened between Polaris and the non-Polaris business that was other surprise to us. And that's where it really presents us the opportunity. The reason why even this year the BEAT tax is there for us is because Polaris is still not being completely being folded up into the India -- into the Virtusa tax structure. As you know, we only own 93% of it. We have now filed with the local tax authorities as well as Supreme Court in India that allowing us to do a full merger of Polaris with Virtusa and what that would mean that -- it's kind of like a mandatory redemption of the other 3%, we feel very good about, there's very strong precedent that the Court has cited on those kind of precedents. If that happens, we will be able to own Polaris 100%. When we're able to own Polaris 100%, that will take off a lot of this BEAT tax exposure. And we are expecting all that (inaudible) to culminate sometime in our Q3, September-October time frame.

Bryan Bergin -- Cowen -- Analyst

Okay. Thank you.

Operator

(Operator Instructions) And our next questioner will be Vincent Colicchio with Barrington Research. Please go ahead.

Vincent Colicchio -- Barrington Research -- Analyst

Hello, Kris. I was working if you can comment on maybe what -- anything, we're in the digital services market overall, in terms of opportunity and then for the BFSI vertical?

Kris Canekeratne -- Chairman and Chief Executive Officer

I'm sorry. Vince, just repeat the question again. I didn't get (Multiple Speakers).

Vincent Colicchio -- Barrington Research -- Analyst

So I wonder, how far along you think we are in terms of penetrating the digital services market opportunity overall and maybe for the BFSI market in particular?

Kris Canekeratne -- Chairman and Chief Executive Officer

Yeah. So great question and thank you for the question. So first and foremost, the amount of work and investments going into digital transformation is rapidly increasing. We see the digital transformation market or the digital engineering market in it -- having two pillars. The first pillar, of course, is the digital transformation side, which is comprised of creating great digital experiences for consumers in terms of all of the services that are provided by enterprises. The simple analogy here is how does an enterprise look and feel like a digital platform company, like Amazon, Google, Uber, Lyft, Facebook, et cetera. And I think we would all agree that there's significant work that has to be done in the enterprise to create that commensurate level of digital service. So in that context, I'd say that the enterprises are in a very early innings in terms of understanding the extent, the scope and the transformation that's required to be able to provide an experience that's commensurate with the experiences provided by the digital platform companies and the reality is that those digital platform companies are consistently expanding the gap. And much of that gap is because of the use -- because of the uses of things like artificial intelligence and machine learning to even further create a more galvanizing experience for consumers. So even though the enterprises are increasing their investments, we believe that there's a significant delta between the experiences of a digital platform company and an enterprise. And the enterprises are playing catch up. So clearly, they are in the early innings there.

Now, the second part or the second pillar is around the BAU, the business as usual or keep the lights on investments and spend of an enterprise. Much of this is strewn with very complex, very redundant, arcane legacy systems and there's clear evidence now that if an enterprise can move their systems and their platforms and their technology assets to the cloud that there are significant cost savings, efficiency improvements, and perhaps most importantly to provide a true digital experience to customers and consumers, you have to link the legacy environment with the digital front ends. And we are starting to see increasing spend in cloudification programs, in deep digital programs, so that enterprises can play catch up and try to provide commensurate levels of service to what consumers are becoming increasingly used to through digital platform companies, the likes of an Amazon, Uber, Lyft, et cetera. So overall, Vince, I believe that we're in the early innings here. Enterprisers are increasing their investments both in terms of digital transformation as well as cloud transformation. And Virtusa is incredibly well positioned to intersect this increasing spend. As a matter of fact, one of the reasons we have such strong momentum, notwithstanding our one large account who has reset and recalibrated their budgets is because they are seeing at large across all industries, across all segments, across all of our clients, very significant appetite by investments. As Ranjan said, we have -- we'll have over four accounts this year that will be spending more than $100 million with Virtusa. So a lot of that is the direct result of the investments that they're making in these areas.

Vincent Colicchio -- Barrington Research -- Analyst

Okay. That's it from me. Thank you.

Operator

And this will conclude our question-and-answer session. And I would like to turn the conference back over to Kris Canekeratne for any closing remarks.

Kris Canekeratne -- Chairman and Chief Executive Officer

Thank you, operator, and I'd like to take this opportunity to thank our global team members for their hard work and commitment toward all of our clients. Thank you and we look forward to speaking with you at the end of our first quarter.

Operator

And the conference has now concluded. Thank you all for attending today's presentation. And you may now disconnect your lines.